The inflation rate in the United States is 4 percent, while the inflation rate in Japan is 1.5 percent. The current exchange rate for the Japanese yen (¥) is $0.0080. aFter supply and demand for the Japanese yen have adjusted according to purchasing power parity, the new exchange rate for the yen will be

Question

Quizplus · Accepted Answer

According to purchasing power parity, a currency with a lower inflation rate should appreciate relative to a currency with a higher inflation rate. 
Thus, the Japanese yen should appreciate relative to the US dollar. 
The percentage difference in inflation rates is (4% - 1.5%) = 2.5%. 
Therefore, the expected percentage change in the exchange rate is approximately 2.5%. 
Starting with the current exchange rate of ¥0.0080, a 2.5% appreciation would give an expected exchange rate of ¥0.0082 ($0.0080 x 1.025 = $0.0082). 
Thus, the best choice is B, $0.0082.

The Inflation Rate in the United States Is 4 Percent